Friday, May 04, 2007

The Most Evil Policy

The minimum wage is one of the most evil policies of the New labour government that I can think of. This is for the simple reason that it harms the poorest, most vulnerable workers in society.

And it is true. The minimum wage causes unemployment. Anybody that denies this should quickly write down why so that they can win the Nobel prize for economics by disproving the most basic concepts of economics. They should also rewrite all the economics curriculums for schools, to stop them teaching all that supply and demand crap.

Simple economics, the laws of supply and demand, tells us that more of a given good will be purchased at a lower price than at a higher price, whilst more of that given good will be produced at a higher price than at a lower price. Raising prices artificially, that is, not in response to an increase in the demand for that good, will cause people to buy less of it. It will also encourage people to sell more of it. Consequently, supply exceeds demand and the market does not clear. As Rothbard explains the following chart:

DD and SS are the demand and supply curves respectively. 0C is the control price and FP the market equilibrium price. At 0C, the quantity demanded is less than the quantity supplied, by the amount AB. Thus, while the effect of a maximum price is to create an artificial shortage, a minimum price creates an artificial unsold surplus. AB is the unsold surplus. The unsold surplus exists even if the SS line is vertical, but a more elastic supply will, ceteris paribus, aggravate the surplus. Once again, the market is not cleared. The artificially high price attracts resources into the field, while, at the same time, it discourages buyer demand. Under selective price control, resources will leave other fields where they serve their owners and the consumers better, and transfer to this field, where they overproduce and suffer losses as a result.

My emphasis. This is basic economics, and yet people deny that minimum wages cause unemployment. If minimum wages do not cause unemployment, then it must follow that it it not the case that people will buy more of a good at a lower price than at a higher one, and the laws of supply and demand are false. Defenders of the minimum wage should publish immediately and expel the nonsense taught in schools.

Of course, they are wrong, minimum wages do cause unemployment. The only way it could not, and the laws of supply and demand be true, is if the national minimum wage is below the level that employers would offer any way - that is, if it is set below the market price. It is possible that such a minimum wage be introduced as a token gesture, but not likely. If I saw you gathering books and old clothes and stuff for a jumble sale, and I said, "I forbid you from selling any of those things for less than £10 each" you would be outraged. You would know that my preventing you offering the jumble at a lower price would mean you not selling it at all. So why defend the same policy when it comes to workers selling their labour?

... despite NMW increases running ahead of both inflation and average earnings over the past three years, there has been no negative employment effect. Employment in lower paying sectors such as retail, restaurants, hospitality and leisure has been growing.

Estimates by economists in the mid-1990s that up to 1.7 million jobs would be lost if a minimum wage were to be introduced now look very wide of the mark

One thing well worth commenting on here, is that there are two ways that the argument is confused. Firstly, the minimum wage can cause unemployment without altering net employment, by causing unemployment amongst certain sectors, or classes of employees. That will be examined later. Here I will just note the second objection, though, that the minimum wage can cause less employment, possibly, without anybody losing work or failing to find it as a result. This will be because an employer once able to hire a worker for thirty hours at £4.90 an hour may now only be able to hire the same worker at a hire wage for twenty hours at £5.10 an hour, for instance. Or an employer willing to offer thirty hours of work to a new worker at £4.90 may now only be willing to offer the same worker twenty hours at £5.10. This new worker will be taken out of "unemployment," will not figure in all the government statistics on employment rates, and yet will be employed at lower levels than they would have been had the wage not been artificially hiked by the government.

The IDS survey is directly contradicted by the retail industry itself. The Yorkshire Forward article linked to above, itself reports,

Earlier this month, the British Retail Consortium (BRC) called for a 'fundamental review' of the aims of the NMW, claiming that the proposed increase in October 2006 could lead to around 35,000 job losses in the retail sector and costing businesses an additional £1.13 billion.

The British Retail Consortium itself reports job losses and pins the blame on the minimum wage. Kevin Hawkins, director general of the BRC, says,

Retailers tell us they are being expected to find 2.7 billion pounds extra for wages over just two years. With other costs, including energy prices, rent, rates and service charges shooting up, it's no surprise so many retailers are cutting staffing costs by employing fewer people.

from 2005 to 2006 the BRC reports that "78,000 retail jobs were lost as minimum wage increases added £1.2 billion to retailers' wage bills." On top of these losses in already existing jobs, the number of people being employed also fell, as

...between 2005 and 2006, the number of people employed by multiple retailers fell by 61,000 (3 per cent) with one in five multiples having reduced headcount. Numbers employed by small and medium sized retailers fell by 17,000 (2 per cent)... Multiple retailers said wage costs per shop floor employee rose by an average 14 per cent between 2005 and 2006. Nineteen per cent of multiple retailers had reduced their total headcount. On average those that reduced jobs cut one post in 20.

Now, returning to that previous point, that the minimum wage can reduce employment without effecting net employment, by harming particular sectors worse than others. This is obvious, because the minimum wage will not effect those for whom's labour the market price is already above the minimum wage. It will only effect those who's market price is below the minimu wage. In other words, it will effect the poorest workers, those that earn the least. Defenders of the minimum wage do not deny this, of course, since effecting the incomes of the poorest earners is precisely why they defend the laws in the first place. They think that the laws will lift the incomes of those lowest earners.

The opposite, however, is what really happens. Why, in a free market, would somebody tend to be a low earner? Because they are not worth a higher wage to the employers. This may be because they are low skilled, for instance. Well, as Milton and Rose Friedman note, "The minimum wage law requires employers to discriminate against persons with low skills. No one describes it that way, but that is in fact what it is."

The Friedmans suppose that we imagine a poorly educated teenager with little skills, worth only, say, $2 (1979) an hour. The teenage could be eager to work at that income to get the the skills to earn a better income. However, the law says that this teenager can be hired only if the employer is willing to pay (in 1979) $2.90 an hour. If the teenager is only worth $2, then the 90c more is purely charity, and it is unlikely that the employer will pay it.

For example, in the chair factory where George works, employees are paid at different levels ($4 or $5 per hour) depending on their experience. If the minimum wage is raised to $5 per hour, several things could happen.

If the employer pays the least experienced people $5 per hour, he will have to raise the price of the chairs. The people who were earning $5 will probably complain because they are being paid the same wage as the novices. The employer will have to give them a raise too. The price of the chairs goes even higher. Fewer people can now afford to buy the chairs, so the factory will cut back production. Workers will be laid off; the least experienced will be the first to go. Instead of earning $4 per hour, some of the inexperienced workers will be unemployed, while others will be making $5 per hour.

Some employers will be able to replace the unskilled workers with machines that cost $4.50 per hour instead of the $5 now mandated by law. The workers from the factory that makes the new machines are very skilled and already make well above the minimum wage. They now have extra orders for machines, so their factory must hire more skilled labor. At the chair factory, some of the more experienced workers make $5 per hour, while some of the unskilled workers are unemployed and make nothing. The machine factory hires more skilled labor.

Other employers might simply eliminate part or all of the job that the people earning $4 per hour once did. Maybe their job was to paint the chairs; now finishing is left to the buyer. More unskilled employees are laid off.

Some employers will not be able to use any of these options. There may be no substitute for the unskilled labor and no way to raise prices without losing too many customers. To comply with the law, these employers may cut back on other employee benefits, such as health insurance, vacation time, etc. The unskilled workers make $5 per hour, but lose some benefits that may have been worth more to them than the wage increase.

If none of these options are available, employers may have to forgo some of their profits. To avoid cutting their profits, these employers may close their factories and either retire or switch to a business that needs only skilled workers. In either case, the employees will be laid off. The skilled workers will have an easier time becoming employed again, because they are needed in places such as the machine factory that is expanding because of the demand for labor-saving devices. The unskilled workers will find themselves in less demand and will have more difficulty.

Each employer will react differently to the minimum wage increase, but the result is always the same. Fewer inexperienced employees will have a job. Instead of making $4 per hour, some will make $5 per hour, and others will make nothing. The best of the low-paid workers get a raise, but the most disadvantaged are forbidden to create what wealth they can.

Another argument as to why the minimum wage will harm the low skilled most is this: Imagine that Julie runs a gardening firm. She knew the teenagers next door, students, not professional gardeners, were looking for work over the summer. She also knows that hiring a professional gardener for a few hours a week would cost her £7 an hour. The two teenagers won't have the gardener's skill, but between them, they could get the same work done. So she offers them £3 an hour each do a few hours a week to tend her customers gardens over the summer... Then the government raises the minimum wage to $3.50. Hiring two unskilled workers would now cost no less than hiring a skilled professional. Julie has no more incentive to keep the students on.

That is the theory. Of course critics will say, "ah, but that is only the theory - the facts do not bear it out. Unemployment has not risen, so your little theories are wrong, and are the pure nonsense we should expect from thinkers in ivory towers who don't come down and live in the real world and have to do proper work for a living" (believe me, people do respond in this way!). However, the theory is born out. The BRC claims above show that jobs are being destroyed amongst lowest paid workers. There is further evidence. The Friedman's report that at the end of the Second World War, the minimum wage was 40c an hour, and that war time inflation had made that so low as to be unimportant. However, in 1950 the minimum wage was raise sharply, to 75, and then to $1 in 1956. In the early 1950s the unemployment rate for teenagers averaged at ten percent, compared to about 4 percent for all workers - a moderately higher rate of unemployment, then, as we would expect for a group of workers just entering the labour force. The unemployment rates for white and black teenagers were roughly equal. After the minimum wage rates were sharply increased, the unemployment rates for white and black teenagers shot up, too. At the same time an unemployment gap grew between the white teenagers and the blacks. By 1979 the unemployment rate ran around 15 to 20 percent for white teenagers, and 35 to 45 for blacks.

Even more conclusive evidence comes from this country, and this time. Introducing the national minimum wage was one of the first things that the Labour Party did when it came to power in May 1997. It is also held up as one of the few successes of that regime now that it is crumbling. However, unemployment amongst young people is now worse than it was when Labour came in. "According to the Office for National Statistics there are now 37,000 more unemployed people aged 16 to 24 than in May 1997, with the total rising from 665,000 to 702,000." The number of long term young unemployed people by 2006 was "178,000 — 78 per cent higher than it was five years ago." The unemployment rate has risen to 14.5 percent among young people, over taking the 14.4 percent that Labour inherited from the Tories. One in four 16 to 17-year-olds are now unemployed, and that is worse in London, where the proportion of 16 and 17-year-olds who are officially unemployed is 42.9 percent, according to the Government's labour force survey.

One should not always focus on the practical and forget the moral. The moral fact is that the minimum wage is an attack on the liberty of workers. It makes it illegal for them to sell their labour, their services to those offering a particular price. So-called liberal democratic defenders of the minimum wage should take not of that fact. In a society where minimum wage is £5.35, no worker is free to sell their labour for less, and if it is their labour, and not the state's, they should be. "Ah," some may respond, "we want them to be free to sell their labour for more than £2." Aside, however, from not showing how a minimum wage suddenly increases this likelihood, that ignores the point that it means that workers are not free to sell for less. They are either free to sell it for £5.35 of more, or not at all - their range of choices as to what they can do with their labour is reduced by the coercive intervention of the state.

Is It paternalism? The Freidmans wrote, "It has always been a mystery to us why a young person is better off unemployed from a job that would pay $2.90 than employed at a job that does pay $2.00 an hour," which would suggest not.

And, needless to say, having made it illegal for employers to offer to employ young workers at wages the employers think the workers are worth, Labour's own efforts to "solve" unemployment have failed miserably. In 1997 Gordon Brown declared that the youth unemployment he had inherited from the Tories was a "human tragedy" and pledged to get 250,000 young unemployed off benefit and into work, by levying a one off windfall tax on utilities to be spent on the New deal for Young People (NDYP). Since then Brown has spent billions on the New Deal, ostensibly to tackle youth unemployment. At the latest count, there have been more than 20 schemes since 1997, targeted at adults, young people and lone parents.

But the New Deal has failed. Not only has youth unemployment risen, as we have seen, but the New Deal has failed to lead to people finding long term gainful employment. In 1998 60.8 percent of youngsters leaving the scheme found work. By 2006 this was down to 34.6 percent. And further than this, half of all New Deal for Young People leavers are back on to benefits in a year, the proportion leaving the scheme to go back on to the Jobseeker's Allowance in 2006 was six times higher than it was in 1998.

Of course many of those that defend the minimum wage have no interest in helping the poor. It makes sense - those shut out of the economy by minimum wage laws are the poorest, least skilled workers. The workers that are hardest to unionise, and so compete with unions, are unskilled workers. Minimum wage laws, therefore, drive out competition against unionised labour. The minimum wage, then, is used to protect establishment jobs and monopoly wages. As Milton Friedman points out

The source of pressure for them [Minimum Wage laws] is demonstrated by the people who testify before Congress in favor of a higher minimum wage. They are not representatives of the poor people. They are mostly representatives of organized labor, of the AFL-CIO and other labor organisations. No member of their unions works for a wage anywhere close to the legal minimum. Despite all the rhetoric about helping the poor, they favor an even higher minimum wage as a way to protect the members of their unions from competition.